Dell Would Have Sold Off on FYQ4, Says Street, But LBO Price May Go Higher

By Tiernan Ray

Shares of Dell (DELL) are up 3 cents at $13.83 following a Q4 report last night featuring revenue and profit per share that topped analysts’ estimates.

On a conference call following the report, during which CEO Michael Dell recused himself given his involvement in the talks about a leveraged buyout of the company, chief financial officer Brian Gladden told analysts that pressure on the company’s PC operations is expected to continue this year amidst aggressive pricing in the market.

Those remarks about PCs are helping to pressure shares of Hewlett-Packard (HPQ) today, which reports results tomorrow afternoon. HP shares are down 7 cents, or 0.4%, at $16.83.

However, the company delivered growth in its server and its networking business, something positive most analysts have noted today.

There have been no ratings changes, that I can see. Some price targets are going up today, as some analysts anticipate the buyout offer will have to go higher to succeed. Although Dell declined to offer a forecast, analysts are cutting estimates.

Brian White, Topeka Capital Markets: Reiterates a Buy rating and a $16 price target, arguing that “a higher price tag will need to emerge to satisfy shareholders.” As for the report, the conference call following “satisfied both the bulls and the bears. For example, Dell highlighted expectations that the IT market will show more positive trends this year compared to last year, while the Company also discussed more intense pricing pressure across the PC world.” White cut his estimate for this year to $55.44 billion in revenue and $1.70 per share from a prior $55.99 billion and $1.83.

Jim Suva, Citigroup: Citi has nor formal rating on the stock, given Citi is involved in the proposed LBO. But that doesn’t stop Suva from opining on the nature of the results. He writes that the quarter was “: Worse than it Looks,” given that “PC Pricing Getting Even More Aggressive.” Notes Suva, “Dell received a one-time $250 million in vendor settlements which the company included in pro forma EPS. These helped EPS by $0.11 and are unlikely to recur.” He also observes that notebook PC sales “were down -25% y/y while desktop revenues down -14% y/y” and that “Dell commented on aggressive industry PC pricing which is likely to continue.”

Maynard Um, UBS: Reiterates a Market Perform rating, writing, “We believe Dell is at a crossroads where revenue pruning and focus on profitable deals are no longer enough to drive gross margin and earnings upside potential. In fact, we believe Dell potentially now loses future revenue opportunity for every commercial deal they walk away from (potential upsell opportunity for other products and services). With competitive pressures unabating, Dell, in our opinion, now needs to win strategic deals (particularly if there is upsell opportunity or if discounted hardware upfront is attached to higher margin recurring services revenue), notwithstanding the need to maintain a certain level of scale (for volume discounts). This, in our opinion, resulted in the gross margin pressure in the quarter that was masked by a 1x vendor settlement benefit to gross margin (180bps). Without a pending take-private deal, we believe DELL shares would likely have sold off on results.”

Richard Kugele, Needham & Co.: Reiterates a Hold rating, writing that the results shown “echoes of recent quarters, with a slow, gradual transition to enterprise solutions and careful margin management of their pressured client business lines. Yawn.” Kugele thinks the LBO will go through at a slightly higher price than the proposed $13.65, or else it will fail and the stock will “plummet to $9-11.” Kugele trimmed this year’s projection to $57.33 billion and $1.73 per share from a prior $57.45 billion and $1.74.

Peter Misek, Jefferies & Co.: Reiterates a Hold rating. Although he has a $13.65 price target, the exact price of the deal, Misek opines “chances of a higher bid are now >50% and see the most likely and fair price to be ~$15 per share. We think the better-than-expected results means that the fair thing to do, in our opinion, is to raise the bid to a price where current shareholders reap some of the rewards while the take-private consortium enjoys the prospect of a respectable return.”

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FEBRUARY 20, 2013 12:23 P.M.

mark wrote:

Everybody appears to be missing something Q4 of last year was a 14 week qtr and a more difficult compare
Like for like the apples to apples y/y growth was more like -8% which was an improvement from Q3 at -11%
If this improving trend continues the comapny would be back in growth no later than Q4 . also if the tax rate had been the same as last qtr it would have added 3c to earnings

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.